Risk Attitudes and Other-Regarding Preferences: An Experimental Study

We study theoretically and empirically the interaction between risk attitudes and other-regarding preferences. An integrated model of risk attitudes and other-regarding preferences that extends the standard notion of inequity discount to lotteries was proposed in Lopez-Vargas (2014). In this model, a decision maker perceives inequity partly by comparing the marginal risks she and others face. The model predicts that fairness considerations will alter risk attitudes, in particular, a higher tolerance to positively correlated (fair) risks compared to negatively correlated (unfair) risks. Further, the model can explain the behavior by which people help others probabilistically (known as ex-ante fairness). Moreover, in contrast with the existing view of ex-ante fairness based on expected outcomes, the model does not imply that stronger ex-ante fairness behavior is associated with less risk sensitivity. We will study these predictions with evidence from an experiment. In a pilot, the primary findings were that subjects take more risks when outcomes are ex-post fair compared to when they are ex-post unfair. A second set of findings was that stronger ex-ante fairness behavior correlates with less sensitivity to risk. The findings would reject the implications of existing models. To generalizes, extend these prior findings, and test these models based on their predictions; we use a new individual-choice lab experiment.